French Telcos Gain on M&A Signals From Policy Wonks

Shares in France's telecom operators have risen after competition authorities yesterday signaled they could drop their opposition to merger activity in the country's telecom market following a network spending spree by operators.

The change in the regulatory position might clear the way for a takeover of Altice's debt-ridden SFR unit by Orange (NYSE: FTE), Bouygues Telecom or Iliad, all of which compete in the market for both fixed and mobile services. It follows speculation that Bouygues has been considering a bid for SFR in partnership with other investors. (See Altice Hails French Recovery as Earnings Rise.)

Previous merger efforts, including an Orange bid for Bouygues in 2016, have foundered partly because of hostility from French antitrust authorities concerned about the impact consolidation would have on competition. Mobile services in France were among the most expensive in the OECD before the market entry in early 2012 of Iliad, which had previously offered fixed broadband services to French consumers. (See End of the Bouygues Affair for Orange.)

But at a news conference in Paris on Tuesday, Sebastien Soriano, the head of French regulatory authority Arcep, said he would not necessarily stand in the way of deal making. "Arcep's position when it comes to consolidation is that we aren't for it but we aren't against it in principle," he is reported to have said, according to a Bloomberg story.

A French government official is also reported to have told Bloomberg that if a buyer makes investment commitments and pledges to protect jobs, the state would not block a deal.

The comments from Arcep and the government helped to boost the Altice share price, which more than doubled in value in Amsterdam on Tuesday, closing at €2.42 ($2.84).

While the sharp increase was largely the result of what Reuters called a "technical adjustment," with shareholders approving the formal separation of Altice's US business from its European arm, the share price had gained another 4.4% during trading on Wednesday morning, at the time of publication. (See Altice Spins Off US Biz, Rejigs in Europe.)

France's other network operators were also boosted by the remarks. Orange gained 4% yesterday, to close at about €14.88 ($17.44), while Bouygues, the owner of Bouygues Telecom, was up 4.5%, at €41.90 ($49.12). Iliad (Euronext: ILD) closed up 7.2%, at €141.55 ($165.93), but remains sharply down on its May 14 share price of €165.50 ($194) after an earnings update came as a disappointment to investors.

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Arcep appears to have taken encouragement from investment activity in the French market over the past few years. Spurred by competition, all four operators have spent heavily on the rollout of higher-speed fixed and mobile networks, giving France the infrastructure to support new digital offerings.

"Two years ago I asked operators to break open their piggy banks, to rise to national coverage challenges, and enable France to catch up on the connectivity front," said Soriano in a statement published on Arcep's website earlier this week. "With an investment of €9.6 billion [$11.3 billion] [in 2017], we are seeing the sector's growing commitment to making up for lost time, and coming in line with the country's infrastructure needs."

But any suggestion that authorities may give up their opposition to merger activity will upset trade unions worried about job losses. It could also have ramifications for consumers by triggering an increase in service charges.

Critics may ask why regulators are thinking of changing their stance when a four-player market appears to have been highly successful. If infrastructure competition has spurred investment activity, then reducing the number of operators from four to three might logically be expected to constrain it.

There is already concern that European economies are lagging those in the US and Asia on preparations for the rollout of 5G, a next-generation mobile technology. "We cannot continually be in a situation of working to catch up," said Soriano in his statement this week. "Now that the sector is fully galvanized, we must absolutely not fall behind with 5G." (See Orange's 5G Plan: Definitely, Maybe.)

Orange expects overall capital expenditure for the group to hit €7.4 billion ($8.7 billion) this year, up from about €7.2 billion ($8.4 billion) in 2017, but has said the increase will go largely toward the rollout of full-fiber networks in Spain. It reckons capital expenditure will start declining in 2019, despite the likely arrival of 5G services in 2019 or 2020.

Responding to Arcep's published statement this week, Orange predicted investments in 5G would increase starting in 2019, however. "We believe that the investment in 5G will be a continuity of that in 4G, for example when we deploy fibre backhaul we already anticipate the requirements of 5G," said Yves Bellego, Orange's director of technical and network strategy, in emailed comments. "For 5G radio, we expect this to ramp-up over the coming years starting in 2019."

Any future consolidation in the French market is unlikely to involve Orange, CEO Stephane Ricahrd told analysts in February, saying he did not want to repeat the "risky and complex" moves Orange made in 2016 when it failed to acquire Bouygues. (See Orange Rules Out M&A Moves in France, Returns to Growth.)

"What is sure is that we will not trigger anything ourselves because we are not in a position to do that," he said at the time. "There will not be a new round of Orange-to-Bouygues consolidation. We cannot buy SFR and we cannot buy Free. If something happens it will be between two other players."

Altice majority owner Patrick Drahi, meanwhile, was said to have told reporters earlier this month that he was not willing to sell SFR and had not been approached by potential buyers, according to Bloomberg.

— Iain Morris, International Editor, Light Reading

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